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27 Jan 2016
BOJ likely to keep policy unchanged - Nomura
FXStreet (Delhi) – Yasuhiro Takahashi, Research Analyst at Nomura, suggests that in the forthcoming BOJ policy board meeting, they expect that the BOJ will leave its monetary policy unchanged.
Key Quotes
“We think the BOJ is highly likely to make relatively large downward revisions to its core CPI forecasts for FY16. However, we expect the bank to argue that these downward revisions reflect changes to its crude oil price assumptions and that the underlying upward trend in prices is still under way.
We see little likelihood of a substantial slowdown in the rise in the CPI excluding fresh food and energy prices, for example, which the BOJ has recently been watching the most closely as an indicator of the underlying trend in prices. In addition, the output gap, which is viewed as one of the two main factors affecting the underlying trend in prices, has been improving on the back of the sustained economic recovery. As for the other factor, longer-term inflation expectations, some indicators are slightly weak, but inflation expectations have not fallen particularly sharply overall.
Nevertheless, we will need to keep a close watch on forex rates. If the yen continues to strengthen and diverges sharply from companies' assumptions (in the December BOJ Tankan survey, the average USD/JPY assumption for FY15 H2 was 118), we see a risk that downward revisions to earnings estimates will dampen corporate business sentiment and thus lead to a slowdown in capex and wage hikes. If USD/JPY were to break below 115 and approach 110, we think the BOJ would be more likely to push through further easing steps at the next policy board meeting.”
Key Quotes
“We think the BOJ is highly likely to make relatively large downward revisions to its core CPI forecasts for FY16. However, we expect the bank to argue that these downward revisions reflect changes to its crude oil price assumptions and that the underlying upward trend in prices is still under way.
We see little likelihood of a substantial slowdown in the rise in the CPI excluding fresh food and energy prices, for example, which the BOJ has recently been watching the most closely as an indicator of the underlying trend in prices. In addition, the output gap, which is viewed as one of the two main factors affecting the underlying trend in prices, has been improving on the back of the sustained economic recovery. As for the other factor, longer-term inflation expectations, some indicators are slightly weak, but inflation expectations have not fallen particularly sharply overall.
Nevertheless, we will need to keep a close watch on forex rates. If the yen continues to strengthen and diverges sharply from companies' assumptions (in the December BOJ Tankan survey, the average USD/JPY assumption for FY15 H2 was 118), we see a risk that downward revisions to earnings estimates will dampen corporate business sentiment and thus lead to a slowdown in capex and wage hikes. If USD/JPY were to break below 115 and approach 110, we think the BOJ would be more likely to push through further easing steps at the next policy board meeting.”